Netflix - Lunar Capital

Net Flicks on Flicks on Flicks

Three years ago, Netflix’s stock price experienced a significant decline of more than 70% from its peak reached at the end of 2021. This decrease was driven by the loss of subscribers for the first time in Netflix’s history. Analysts also argued that Netflix was unable to maintain its market leadership and effectively counter the competition. Concurrently, inflation in the United States was rising to levels not seen for decades.

However, last week, Netflix achieved new stock price highs, with the stock closing at $977 on Friday. Netflix ended the week with price-to-earnings ratio of just over 49 and a market capitalization of $417 billion.

Netflix saw an increase in their number of subscribers by nearly 20 million in Q4 2024, reaching just over 300 million subscribers worldwide. Revenue for Netflix rose by 16% to $10.24 billion, while operating profit grew by 52% to $2.3 billion. The significant rise in profitability was attributed to operational leverage. Netflix managed to expand its subscriber base without a proportional increase in operating costs. The below graph shows the change in profitability for Netflix over the last two years.

Why is there so much positivity behind Netflix’s business?

Netflix is uniquely positioned to concentrate their efforts exclusively on streaming, unlike competitors in the entertainment sector who balance their newer streaming initiatives with their currently-profitable legacy assets.

Other competitors, such as YouTube (a subsidiary of Alphabet) and Amazon Prime, have primary businesses in areas such as search and e-commerce that demand extensive company resources in terms of effort and capital. Consequently, these companies may not place a high enough priority on their streaming business, potentially resulting in a loss of market share.

Netflix also has an extensive lineup of new shows and movies scheduled for release this year, as part of its strategy to further expand its revenue base. The company has also introduced advertising packages in numerous markets and plans to scale these efforts throughout the year. Following the success of live events such as the Jake Paul vs. Mike Tyson fight, Netflix is exploring opportunities to develop its live events segment, focusing on occasional events rather than expensive, year-long sports leagues.

However, despite their recent successes, Netflix faces significant competition, increasing costs, and shifting consumer preferences. A few missteps could considerably impact the company’s performance.

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What’s Up Walt

Weekly Stocktake / By VCS Agency

The Walt Disney Company holds a diverse portfolio of brands and assets. These include Disney, Marvel, Star Wars, Pixar, 21st Century Fox, sports broadcaster ESPN, and Disney Experiences. Since the onset of the pandemic, Disney has faced challenges in maintaining its previous level of success. The segments have not always done well simultaneously.

Disney’s multiple business segments that drive the revenue for the company:

Experiences – includes their theme parks and Disney cruises.
Entertainment – includes their streaming platforms, linear tv assets, and box office hits .
Sports – includes their ESPN assets.

During the Covid pandemic, Disney’s streaming service, which was in its early stages, contributed to the company’s growth. The strategy was to leverage its extensive catalogue of creative and entertainment Intellectual Property (IP) to attract more users to its brand and transition users from its traditional linear television business to a more streaming-focused model.

Its Direct-to-consumer business (DTC) which includes Disney+ and Hulu, currently have just under 175 million paying subscribers globally. Average revenue per user (ARPU) per month in the United States for Disney+ is $7.70, compared to Netflix, which has an ARPU of $17.06. Netflix’s streaming service also boasts 282 million subscribers globally, over one hundred million more than Disney’s streaming platform.

Growth at Disney for its DTC business has slowed significantly since the peak during the Covid period. Revenue for the quarter for its DTC business increased by 16% to $5.8 billion. A notable development is that Disney’s operating income for their DTC platform was positive at $0.3 billion for the current quarter, an improvement from a peak loss of $1.5 billion in Q4 2022.

Disney’s parks and experiences business had the highest operating income among its segments, reaching $1.7 billion for Q4 2024. The segment performed well following the COVID-19 pandemic due to increased demand. However, with consumers facing financial pressure, the experiences business saw a year-over-year growth of only 1%, totalling $8.2 billion for the the quarter.

Disney’s CEO Bob Iger has stated that the current focus of Disney is to return creative control to their various brands and segments. He asserts that producing quality content for audiences encourages engagement with related content, whether from their streaming platform or their experiences business. It remains to be seen if Disney can effectively compete across all its business segments in the extremely competitive entertainment industry.

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